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Price Regulation and the Cost of Capital

Fernando Camacho () and Flavio Menezes

No 413, Discussion Papers Series from University of Queensland, School of Economics

Abstract: This paper investigates how price regulation under moral hazard can affect a regulated firm’s cost of capital. We consider stylised versions of the two most typical regulatory frameworks that have been applied over the last decades by regulators: Price Cap and Cost of Service. We show that there is a trade-off between lower operational costs and a higher cost of capital under Price Cap regulation and higher operational costs and lower cost of capital under Cost of Service regulation. As a result, when the extent of moral hazard is not significant, Price Cap regulation generates lower welfare than the Cost of Service regulation.

Date: 2010
New Economics Papers: this item is included in nep-bec and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:413

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